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From Securities Regulation Daily, March 24, 2016

Novartis subsidiaries bribed Chinese officials to increase sales

By Amanda Maine, J.D.

Novartis AG has agreed to pay $25 million in disgorgement and penalties for violating the Foreign Corrupt Practices Act (FCPA). Employees and agents of Chinese subsidiaries of the Switzerland-headquartered pharmaceutical company allegedly provided cash and gifts to government officials in China in connection with its pharmaceutical sales (In the Matter of Novartis AG, Release No. 34-77431, March 23, 2016).

Payments. The SEC alleged that employees of a Novartis Shanghai subsidiary provided gifts, travel, improper sightseeing and vacations, and family favors to Chinese officials, principally healthcare professionals (HCPs). Employees and agents of Novartis’ Beijing subsidiary also made payments to Chinese government officials. These payments were intended to influence HCPs and increase sales of Novartis pharmaceutical products.

The Novartis subsidiaries improperly recorded the payments to the HCPs as legitimate expenses, according to the SEC. The illicit payments were recorded on the general ledger as employee expenses, sponsorships, conferences, medical studies, and marketing costs.

Novartis review. Novartis instituted a review of its Chinese subsidiaries in connection with an SEC investigation and media reports about a competitor in 2013. The review showed that events funded by Novartis for HCPs did not comply with Novartis’s policies and procedures, including maintaining inconsistent records and non-verifiable events. As a result of the review, Novartis was able to identify weaknesses in its internal controls over third-party relationships in China.

Charges and sanctions. The SEC charged Novartis with violating the books and records and internal controls provisions of the FCPA. Without admitting or denying the SEC’s allegations, Novartis agreed to pay disgorgement plus prejudgment interest of $23 million and a civil monetary penalty of $2 million. It also agreed to cease and desist from future violations.

As part of the settlement, Novartis agreed to a series of undertakings, including reporting to the Commission regarding its FCPA compliance program and performing follow-up reviews of its efforts to improve its compliance policies. The SEC noted in its order instituting administrative proceedings that Novartis has already taken remedial steps to improve internal controls at its Chinese subsidiaries, including terminating culpable employees, suspending certain vendor relationships, increasing its training initiatives, and reorganizing its compliance program to include enhanced oversight by regional and headquarter personnel.

The release is No. 34-77431.

Companies: Novartis AG; Shanghai Novartis Trading Ltd.; Beijing Novartis Pharma Co., Ltd.

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